INTRODUCTION
Service costing is defined as “cost accounting for services or functions, for example canteens, maintenance and HR. These may be referred to as service centres, departments or functions”.
Service industries are different to manufacturing in that their outputs are intangible. However, service outputs still have a production cost and the organisation must be able to determine these costs in order to run the business efficiently.
It is important to note that no new costing principles are involved when moving from one type of business to another. But it must be decided what are the relevant cost units and how the elements of cost in materials, wages and other expenses may be analysed and classified in order to ascertain the cost of these cost units.
SERVICE COST UNITS
One of the biggest problems in service industries is identifying a cost unit that represents an appropriate measure of the service provided. A composite cost unit is often used. The nature of the service provided should determine the cost unit used.
Examples of these composite cost units are given below:
| Service | Cost Unit |
| Hospital | Patient days |
| Accountancy Services | Chargeable man-hours |
| Electricity generation | Kilowatt hours |
| Restaurant | Meals served |
| Transport company | Passenger miles |
| Carriers | Ton-miles |
In addition, some service organisations may use a number of different cost units the measure the various kinds of service that it provides. For example, a hotel provides a variety of services, each of which may be measured separately as follows:
| Service | Cost Unit |
| Accommodation | Occupied bed nights or Guest days |
| Restaurant | Meals served |
| Function facilities | Time based (e.g. hours) |
COST COLLECTION AND COST SHEETS
Having decided the cost unit to be used, it is important that the appropriate statistical information is gathered and recorded properly. Cost Sheets record the costs of each service that is provided.
At regular intervals, these cost sheets are prepared by the cost accountant to provide information to management. The cost sheet would, typically, include the following for both the current period and the aggregate year to date: (i) Cost information
- Cost units statistics
- Cost per unit. This is the average cost per unit and can be calculated as follows: Total costs per period .
No. of service units supplied in period
- Perhaps some non-cost statistics may also be provided which may be useful to management, for example, average miles per gallon of fuel
The data from these cost sheets are then used to provide cost reports. These reports are a summary of the totals for the period and may be further analysed into fixed and variable costs.
INTERNAL SERVICE ACTIVITIES
Most modern organisations have internal services departments, such as HR, stores, maintenance, canteen etc. It is not unusual for these departments to involve significant costs. The cost of these departments must be calculated, principally for two main reasons.
- To control costs in the service department. This enables management to compare the cost against a target (budget) and also to compare actual costs against previous period costs for the department.
- To control costs of the user department and prevent the unnecessary use of services. If the cost of services is charged to the user departments so that the charges reflect the use made of the departments of the services, the overhead cost of user departments will be established more accurately and may discourage excessive use of the service if that cost is significant.
